Cash management revenue resiliency through technology and innovation

Annual EY Cash Management Services Survey reveals the health of the banking industry’s cash management business during the COVID-19 pandemic.

In brief

• Unprecedented pandemic shutdowns and slowing global trade combined with declining economic output throughout 2020 led to a 4.5% decline in cash management revenue.
• Despite the decline, the cash management business remains profitable with strong margins and measures nearly US$18 billion.
• The industry’s adoption of new and emerging technologies is increasing, while FinTechs emerge as sources for new capabilities and offerings.

The phrase “cash is king” or the importance of cash flow has taken on added significance during the ongoing COVID-19 pandemic. Global repercussions from economic and market disruption have intensified the importance of preserving liquidity for banking industry and cash management professionals. Furthermore, the fee revenue from the provision of services that facilitate the flow of transactions is essential to demonstrating resilience in the face of rapid, ongoing change.

In January 2021, the EY Cash Management practice initiated the 38th annual Cash Management Services (CMS) Survey, inviting participating financial institutions and other top 100 bank holding companies that actively market treasury services to wholesale customers in the US to respond. Considered the benchmark for the health of the banking industry’s corporate cash management businesses, the survey polled 44 financial institutions, up from 42 responses in the 2020 survey. This includes 90% of the top 20 targeted banks, based on asset size, and 72% of the top 50 participating.

Top findings from this year’s survey include the following:

• Pandemic impact and the various government responses led to the largest decline in cash management revenue observed over four decades of measuring cash management revenue, correlated to declines experienced in US GDP and interest rates.
• Despite this decline, the cash management business remains profitable with strong margins and is a significant business and source of revenue for banks in the US.
• The top players in the space that accounted for most of the industry’s revenue were more disproportionally impacted than the rest of the industry by the decline.
• The cash management products with greatest loss were paper-based or tied to physical channels, while electronic and digitally enabled transactions experienced far less negative impact.
• New product and technology adoptions are increasing, including further acceptance and utilization of virtual accounts, blockchain-enabled transactions, real-time payments and FinTech partnerships essential for remaining competitive considering a rapidly evolving landscape.

Dramatic revenue decline tempered by strong margins

The COVID-19 pandemic created noteworthy instability and high volatility in global capital markets. As the banking industry’s performance and health, to an increasing extent, depends on the economic health of its borrowers, unprecedented pandemic shutdowns throughout 2020 led to an overall 4.5% decline in cash management revenue. This was the largest decline displayed in the CMS Survey’s nearly four decades of monitoring reported cash management revenues. Translated to dollars, the industry’s revenue plummeted about US$850 million. Despite this decline in revenue, the cash management business remains profitable, measuring nearly US$18 billion and contributing strong margins to bank profitability.

Large banks impacted the most

Purchasing cards, bank-issued card products that control the purchasing process for business or government users, have long been a high-growth product based on greater industry adoption. Substantial portions of purchasing card spend are tied to travel and in-person or in-office activities, which slowed precipitously in 2020 as lockdowns forced people to work remotely and isolate at home. Spurred by this marked drop in revenue from purchasing cards, the top 5 banks with the highest revenue totals were impacted the most with an estimated 6.5% decline in 2020, while revenue from the remaining 15 banks in our top 20 banks surveyed (Peer 1) declined by 4%. In addition, about two-thirds of the smaller banks that we surveyed (Peers 2 and 3) recorded mostly modest gains. And when estimating growth for 2021, the overall survey respondents’ estimate for 2021 was for 3.5% revenue growth. While a 3.5% increase will not bring the cash management business back to pre-pandemic levels in 2021, this trajectory suggests that the industry can reach or top US$18.6 billion by 2022.

Electronic transactions rise as paper-based products decline

In addition to the drop in revenue from purchasing cards, the health concerns and restrictions of the COVID-19 pandemic caused both consumers and retailers alike to limit using physical contact and currency, with store locations impacted as more sales moved online. As such, revenue from products tied to paper-based or physical channels declined 15% in 2020, while increased digitization of consumer interactions prompted combined revenue from electronic products, such as ACH and EDI, to increase 4.5%. And of the physical products experiencing decline, check clearing was down 14% as consumers transitioned from using paper to electronic transactions, and retail lock box (RLBX) revenue declined by a significant 20%, due in part to exits from the business by large players as well as a decline in volumes.

New technology and products adoption

New products and technology innovation and adoption can rapidly create efficiency and increase cost savings in the cash management business. Despite this, our 2021 survey findings indicate that adoption of virtual account management (VAM), real-time payments and blockchain technology, although increasing, is off to a slow start. VAM enables corporate clients to create virtual accounts within an existing bank account and manage and monitor these virtual accounts, which facilitates self-servicing and supports reporting and reconciliating services. Nearly half of the 44 banks that we surveyed reported that they either had a VAM solution up and running, a VAM solution was currently in development, or they were investigating or considering adding a VAM solution.

In addition to VAM solutions, we asked respondents if their banks initiated any transactions via The Clearing House’s real-time payments (RTP) system, and 12 of our top 20 banks reported they had initiated these transactions, up from 8 banks in 2020. In addition, we also asked how many transactions were initiated via RTP for external wholesale customers. Eleven of the 12 banks responded, with a little less than 8.2 million transactions processed. Although nearly double the 4.5 million transactions measured in January 2020, the caveat is that like 2020, one bank performed most of these transactions. Our 2021 survey findings also indicate that blockchain adoption for payment verification or to facilitate digital asset transactions remains quite low, with most respondents indicating that they currently do not have plans to use blockchain technology for payment verification or for digital asset transactions. We continue to hear strong interest from participants in capturing information related to new and emerging technologies and anticipate these services will continue to grow, with rapid widespread adoption over the coming years.

Perspectives on FinTech

The forced lockdowns and restrictions of the COVID-19 pandemic rapidly accelerated transformation in how consumers interact with financial services, creating tremendous growth in digital financial platforms and transactions. This provided an opening for FinTechs and other big tech platforms to increase market share and provide consumers with essential financial services. And whether viewed as customers or competitors, there’s general agreement that nontraditional providers are here to stay. As such, the survey findings reveal that the top 20 banks polled view FinTechs as customers, with the majority actively targeting FinTechs, but outside the top 20, the percentage declines rapidly, with only 25% of the smaller institutions reporting having FinTech clients.

When asked their opinion of whether they perceive FinTechs as vendors, partners, customers or competitors, while they view FinTechs as customers, the top 20 banks do not see FinTechs as competitors but consider them vendors or sources for new capabilities and offerings, as well as partners. The smaller institutions surveyed view FinTechs primarily as vendors, with the potential to be partners or competitors. Overall, the viewpoint regarding FinTech has also rapidly evolved since we first began to survey on this item, with a general migration of FinTechs being a threat to revenue, to an opportunity for greater performance and higher levels of customer service.

Average rank assigned to various roles FinTech firms can play